Literacy Framework
1. Ambiguous Terms
- Lodging Business: In the 'Conribution to GDP' statistics, the lodging business refers to the 'industry'. However, in the 'Facilities and Equipment Standards for Public Health Businesses' in the "Enforcement Regulations of the Public Health Control Act", the lodging business means the 'business place'.
- Lodging Property: In the 'Paroperty Types by Use' in the "Enforcement Decree of the Building Act", lodging property means a 'use of a building' designated through a building permit and a building ledger. However, in the statistics of the 'Domestic Travelers Survey', the lodging property is referring to the 'business place' regardless of the 'use of a building' designated by the law.
2. Upper Concepts
Lodging Product
The dictionary definition of ‘lodging’ is ‘a place someone pays to stay in while they are away from home’.1 The keywords in this definition are ‘price’, ‘place’, ‘temporary’ and ‘stay’, which define the essential nature of the lodging product. In other words, the key components of the lodging product are ‘price’, ‘place’, ‘time’, and ‘service’. Here, place and service are controlled by the supplier, while time is the consumer’s choice. Price can be illustrated as the outcome of agreement on a transaction between the supplier and the consumer.
- Place: It is a concept that encompasses location and facilities, meaning the physical components of a lodging product. Location refers to the land from a supplier’s point of view, and its value varies depending on accessibility, views, and surrounding attractions from a consumer’s point of view. Facilities mean buildings from a supplier’s point of view, and their value varies depending on size, composition, comfort, etc. from a consumer’s point of view.
- Service: Narrowly, it means the assistance provided to consumers in using the location and facilities like home, which includes essential help in maintaining their daily routines, such as eating, cleaning rooms, washing, and transportation. Broadly, it includes opportunities for things that are hard to experience at home, such as banquets. From a consumer’s point of view, the value varies depending on the range of services provided.
- Time: The transaction of a lodging product is carried out on a daily basis with a specific timing. One place can produce different products if the timing of consumption is different, and a lodging property with 100 rooms normally produces 36,500 guestroom products in a year. Usually, the period when demand is concentrated is called ‘high season’ while it is called ‘low season’ when demand is lowest.
- Price: It means the value of the product that the consumer and the supplier agree on a transaction. In general, the laws of supply and demand apply, and the price goes up in high season, as competition among consumers increases, while it goes down in low season, as competition among suppliers increases.
Value Chain
The dictionary definition of the value chain refers to ‘a series of steps in which value is added in the process of producing goods and services for the purpose of transaction’.2 In the case of lodging products, the volatility in price is noticeable because they produce products that cannot be in stock due to the factor of time. In the lodging industry, a value chain has developed to effectively respond to this volatility, and the most commonly used model at this point is the ‘structured value chain’ where owners, operators, financiers and advisors split roles.
- Owner: It is responsible for securing and maintaining the ‘place’, which accounts for the largest portion of the assets in producing lodging products, and the owner takes the greatest risk because it invests the largest amount of capital. The key objective is to maximize capital gains through asset value appreciation, and for this purpose, the main motivation is to connect the lodging market, capital market and property market.
- Operator: It is responsible for producing and distributing ‘service’ among the components of the lodging product, as well as efficient management of working capital in response to the volatility of the lodging market. The key objective is to maximize cash flows through revenue increase and expense reduction, and the biggest motivation is to secure and improve the competitiveness of the lodging product.
- Financier: Although it is not actively involved in the lodging business itself, it provides the capital required to the owner for securing the property and to the operator for working capital. The key objective is to maintain solvency of the owner and operator, and to this end, it continuously monitors the owner and operator’s creditworthiness, as well as the stability of asset value and cash flows.
- Advisor: It collectively refers to entities that provide various business services to achieve the goals of owners, operators and financiers, and includes experts in various fields such as accounting, appraisal, consulting, travel, advertising, payment and credit rating. The key objective is to discover and realize growth opportunities, and to this end, it continues to monitor trends in the competitive environment.
3. Lower Concepts
Lodging Market
The dictionary definition of the market is ‘an abstract area where goods and services are traded’.3 Therefore, the lodging market refers to an abstract area where lodging products are traded between suppliers and consumers. Abstract areas collectively refer to physically partitioned and virtual areas, meaning that the place of transaction between multiple suppliers and consumers cannot be specified.
One of the unique characteristics of the lodging market is that supply is inelastic, while demand is elastic. Due to this asymmetry, the volatility of prices and cash flows is noticeable in the lodging market.
- Seasonality: It means that there is a short-term fluctuation in prices and cash flows between high season and low season in a year. In general, it shows different characteristics depending on the location, but seasonality does not appear much in urban areas catering mostly to business demand, although demand tends to be a little more concentrated in autumn. On the other hand, seasonality is dramatic in non-urban areas catering to leisure demand, and demand tends to be highly concentrated in summer and winter, the holiday seasons.
- Cyclicality: It means a repetitive pattern of highs and lows in prices and cash flows in the long term. This is attributable to the imbalance between supply, which takes about 2-3 years from product planning to supply, and consumption happening on a daily basis. Unlike seasonality, it has a significant ripple effect affecting asset value and liquidity. The surest way to respond is to keep a certain level of liquidity on a fixed basis.
Lodging Industry
The dictionary definition of industry is ‘a collection of suppliers that produce a particular product’.4 Therefore, the lodging industry refers to the universal set of suppliers that produce lodging products. It is also a subset of the lodging market because it does not include demand, which is the subject of consumption. However, the scope of the lodging industry may also vary because the range of lodging products may be differently by regulation.
The lodging industry, which has existed since BC, is demonstrating standardized characteristics across the world. In general, the following features are common.
- Capital Intensive: Since the place, which is a tangible asset, forms the basis of the product, large-scale investments must be made in the early stages, and the fixed cost of maintenance is large. Therefore, the lodging industry is characterized by being sensitive to trends in the capital market, such as fluctuations in interest rates.
- Labor Intensive: Unlike ordinary real estate businesses, the service must be produced repeatedly every day because it is rented on a daily basis. And such process is highly labor dependent. Therefore, the lodging industry is characterized as being sensitive to trends in the labor market, such as fluctuations in labor costs.
- Red Ocean: In the lodging industry, which has expanded over a long period of time, the competition is fierce as numerous suppliers produce and distribute standardized products in large quantities. In the case of the red ocean industry, suppliers commonly compete for market share, and economies of scale provide an advantage.
Lodging Business
The dictionary definition of a business is ‘the act of selling or buying a specific good or service’ or ‘an individual or corporation that conducts such an act’.5 In Korea, the former is commonly accepted. Therefore, the meaning of lodging business in Korea can be said to be the act of suppliers producing lodging products and supplying them to the lodging market.
The lodging business is also a subset making up the universal set of lodging industry. To operate a lodging business, you must first complete the appropriate business registration. This involves specifying a detailed category based on the Korean Standard Industrial Classification (KSIC). Specifically, the sub-sub-class you select from the KSIC will be listed as the Business Type on the Business Registration Certificate.
The 11th KSIC classifies the lodging business into the general and residential lodging business, and the other lodging business. The general and residential lodging business is further divided into hotel, resort condo, yeogwan, minbak, campsite and other general and residential lodging businesses, while the other lodging business is further divided into the dormitory and gosiwon operation and the other miscellaneous lodging business.
Meanwhile, the “Enforcement Decree of the Tourism Promotion Act” subdivides the hotel again into tourist hotel, floating hotel, traditional hotel, family hotel, hostel, small hotel and medical hotel. In addition, the “Public Health Control Act” integrated ‘yeogwan’ and ‘yeoinsuk’ from the “Public Health Act” into the general lodging business, and separated the residential lodging business from it.
Lodging Enterprise
The lodging enterprise refers to the entity that finally delivers the lodging products to the lodging market. It is an entity standing at the front of the lodging business, as an element that constituting the universal set of the lodging industry and belonging to one of the subsets in the lodging industry. In addition, it refers to an operator in the context of the structured value chain. In addition, it refers to an operator in the context of the structured value chain.
Lodging exterprises refer to the entity that produces services, the final stage in producing lodging products, and are not required to possess the place, which is the largest asset. Therefore, the exterprise type can be subdivided depending on how it sources the place.
- Owner Operator: The owner of the place directly registers as the lodging enterprise, playing the role of an operator, with tangible assets accounting for the largest portion in its financial statement and non-current liabilities are typically larger than its paid-in capital. However, since the amount of depreciation costs in the income statement is large, liquidity can be secured through accumulation of surpluses, which will be used as a source for renovation in the future.
- Leased Operator: An operator who does not own a place but rents another owner’s place to run a lodging business, and it is relatively light-weight in total assets because the size of non-current assets, including tangible assets, is not as significant in its financial statement. Instead, the proportion of current assets, as compared to total assets, relatively large, and depending on market conditions, it can be excessive compared to the size of total assets.
- Third-Party Operator: It is a common model of global hotel brands to produce and sell services, entrusted with the role of operators from the legal entity of the lodging business. The operating contract secures control over the place, while not sharing the financial risks borne by the legal entity of the lodging business. Instead, it focuses on maximizing cash flows and its commission tied to the cash flows.
Lodging Property
The most direct definition of lodging properties is the one provided under the Building Act. The Building Act classifies buildings by use into 30 categories, and “lodging properties” are one of them. A building’s use classification—i.e., the category of building use—is a factor that determines what types of buildings may be constructed on a given parcel. For example, if a parcel is designated as a “residential zone,” it is highly likely that a “lodging property” will not be permitted.
In Korea, the law most broadly applicable to the lodging business is the Public Health Control Act, which applies to the general and residential lodging properties operation. The facility standards for hotels and resort condos that qualify as tourist lodging properties are governed by the provisions of the Tourism Promotion Act. In general, the standards are primarily centered on the number of guest rooms and the types and scale of ancillary facilities.
Meanwhile, under the KSIC, there are subcategories of the lodging business that use buildings designated for purposes other than lodging properties under the Building Act. Representative examples include minbak businesses and campsite businesses. Minbak businesses use single-family houses or multi-family housing under the Building Act, while campsite businesses use campsite facilities as defined under the Building Act.
Furthermore, regarding the dormitory and gosiwon operation—which are classified as the other lodging business rather than the general and residential lodging property operation under the KSIC—the standards stipulated in the Public Health Control Act, the Tourism Promotion Act, and the Agricultural and Fishing Villages Improvement Act do not apply. In addition, facilities such as youth training centers or accommodations within natural recreation forests, while not technically classified as lodging businesses under the KSIC, operate in a similar manner and can therefore be considered lodging properties in a broader sense.
Regardless of the definition, the lodging property typically consists of three parts.
- Guestrooms: Guestrooms are spaces for sleeping and are the most essential part of a lodging property. While some lodging properties might lack other parts, none can exist without guestrooms. Additionally, the quality of guestrooms is the most significant factor influencing the pricing of lodging products.
- Amenities: Spaces where optional services are provided, other than sleeping, are called amenities. For example, food and beverage outlets, lounges, banquet halls, swimming pools, and casinos fall under amenities. Depending on the type of lodging property, the relevant laws may specify the requirements for amenities.
- Public Facilities: Public facilities do not directly generate revenue, but without them, the establishment cannot fulfill its role as a standalone product. The lobby is an example of public facilities. Other public facilities include parking lots, staff spaces, mechanical rooms, electrical rooms, and linen rooms.
Lodging Establishment
The lodging establishment refers to the minimum unit of infrastructure that can produce and distribute lodging products independently on a daily basis, and is a combination of a lodging enterprise and a lodging property. In fact, the definitions and uses of a lodging enterprise and a lodging property do not exactly match the units of production and distribution of lodging products. This is because lodging enterprises and lodging properties are not always under one-on-one relationship.
After all, a separate concept is needed for the independent production and distribution unit to analyze lodging market data effectively, and Lobin uses the lodging establishment for it. There may be disagreements because it is not a term defined in the law, but it is used generally according to the following criteria.
- If locations are different, each is considered a separate establishment. For example, the Shilla Hotel Seoul and the Shilla Hotel Jeju, operated by a single lodging enterprise called Hotel Shilla, constitute both different lodging properties and different lodging establishments. This is because each is sold as a separate product targeting different set of demand.
- If business types are different, each is considered a separate establishment. For example, ‘Novotel Seoul Yongsan’ and ‘Novotel Suites Seoul Yongsan’ located in a single building are separate establishments, although they are in a lodging property operated by a single enterprise. Novotel Seoul Yongsan, a tourist hotel, uses from 5th to 24th floors and is sold for general transient demand. On the other hand, Novotel Suite Seoul Yongsan, a family hotel, uses from 25th to 40th floors and is sold mainly for an extended-stay demand.
- If sold with different names, each is considered a separate establishment. For example, ‘Grand Walkerhill’ and ‘Vista Walkerhill’ are operated by a single enterprise under an identical business type of tourist hotel. However, the separate room towers are considered separate establishments because they are sold as different products with different names.
- If lodging enterprises are different, each is considered a separate establishment. For example, the Sea Cloud Hotel and the Sun Cloud Hotel, located in a single lodging property, are different establishments, although their business types are the same as residential lodging. This is because different enterprises operate each part as a separate product.
- A number of properties operated by the same enterprise on the same location with the same business type are considered a single establishment. For example, the ‘Flower Village’ of ‘Muju Deogyusan Resort’ is a complex consisting of seven towers: Dandelion, Forsythia, Sun Flower, Camomile, Cosmos, Lily and Azalea. All of them are operated by a single enterprise under the same business type, as a single product.
- When the ownership of each room is different, the whole is considered a single establishment. In the case of resort condo or condo hotels that can be deeded by unit, each unit is an independent lodging property from a legal point of view with separate a building ledger and a property deed. However, if each unit is not sold as an independent product while a single enterprise operates the whole as a single product, it is considered a single establishment. In addition, if two buildings on adjacent sites with different owners are sold by a single enterprise as a single product, they are also considered a single establishment.
